Property stocks like FTSE 100-quoted British Land (LSE: BLND) are popular shares during periods of high inflation. Their historical ability to raise rates in line with broader price rises allows investors to protect themselves against the ravages of inflation.
But should I invest in British Land right now? This FTSE index share has soared in value in recent weeks. But as Britain teeters towards recession I think a fresh share price correction could be coming.
BNP Paribas has painted a gloomy outlook for the capital’s property sector. It says that investment in Central London commercial properties dropped 8% year-on-year in the second quarter. Investment in office spaces was particularly weak, slumping to £2.9bn from £5.3bn in quarter one.
Fragile dividend forecasts?
The darkening outlook suggests to me that British Land’s dividend forecasts could prove wildly optimistic. Based on current estimates the business sports a 4.4% dividend yield.
In particular I worry about the firm’s ability to pay market-beating dividends given the condition of its balance sheet. The business had adjusted net debt of £3.5bn as of March, up around half a billion pounds year-on-year.
At the same time British Land’s predicted dividend is barely covered by anticipated earnings. The projected 21.3p per share reward boasts dividend cover of just 1.2 times. A reading of 2 times is considered the minimum for investors to have peace of mind.
Risk vs reward
I might be prepared to buy British Land shares if the company’s long-term outlook remained robust. On the plus side the business has exposure to the white-hot residential property market that should boost earnings.
However, I believe demand for office and retail space is in a state of structural long-term decline. Many companies are adopting more flexible working practices, which is reducing the need for permanent office space.
Meanwhile the need for physical retail space going forward looks increasingly gloomy as e-commerce grows. In this landscape I struggle to envision firms like British Land generating robust shareholder returns in the years ahead.
7.2% dividend yield
I’d much rather get exposure to UK property by buying one of the FTSE 100’s listed housebuilders. In fact I already own several in my shares portfolio including Taylor Wimpey (LSE: TW).
And given the size of the company’s dividend yield I’m tempted to increase my holdings. For 2022 the construction business carries a mighty 7.2% yield.
What’s more, this year’s predicted 9.2p per share dividend is covered 2.1 times by projected earnings.
Now, Taylor Wimpey doesn’t come without its share of risk either. As well as the threat posed to homebuyer demand from rising interest rates, profits at homebuilders like this are also under threat from rising cost inflation.
Just today Mace Group boss Gareth Lewis warned of the “unprecedented” inflation facing the industry.
The right choice
That being said, I still believe stocks like Taylor Wimpey are great buys today. This is because property prices continue to soar (up 9.7% year-on-year in July, according to Rightmove), insulating the builders from rising costs.
The United Kingdom’s housing supply shortage is acute and looks set to persist for years to come. So I think property prices and housebuilder profits should keep moving steadily higher. This is why I plan to own my Taylor Wimpey shares for the long haul.
